SanDisk 2008 Annual Report Download - page 27

Our global operations and operations at Flash Ventures and third-party subcontractors are subject to risks
for which we may not be adequately insured. Our global operations are subject to many risks including errors and
omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or
telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters. No
assurance can be given that we will not incur losses beyond the limits of, or outside the scope of, coverage of our
insurance policies. From time-to-time, various types of insurance have not been available on commercially
acceptable terms or, in some cases, have been unavailable. We cannot assure you that in the future we will be
able to maintain existing insurance coverage or that premiums will not increase substantially. We maintain
limited insurance coverage and in some cases no coverage for natural disasters and sudden and accidental
environmental damages as these types of insurance are sometimes not available or available only at a prohibitive
cost. Accordingly, we may be subject to an uninsured or under-insured loss in such situations. We depend upon
Toshiba to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures.
If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause
Flash Ventures to breach various financing covenants. In addition, we insure against property loss and business
interruption resulting from the risks incurred at our third-party subcontractors; however, we have limited control
as to how those sub-contractors run their operations and manage their risks, and as a result, we may not be
adequately insured.
We are exposed to foreign currency exchange rate fluctuations that could negatively impact our business,
results of operations and financial condition. A significant portion of our business is conducted in currencies
other than the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates. These
exposures may change over time as our business and business practices evolve, and they could have a material
adverse impact on our financial results and cash flows. Our most significant exposure is related to our purchases
of NAND-based flash memory from Flash Ventures, which is denominated in Japanese yen. In fiscal year 2008,
the Japanese yen significantly appreciated relative to the U.S. dollar and this has increased our costs of NAND
flash wafers, negatively impacting our gross margins and results of operations. In addition, our investments in
Flash Ventures are denominated in Japanese yen and adverse changes in the exchange rate could increase the cost
to us of future funding or increase our exposure to asset impairments. We also have foreign currency exposures
related to certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia. Additionally,
we have exposures to emerging market currencies, which can be extremely volatile. An increase in the value of
the U.S. dollar could increase the real cost to our customers of our products in those markets outside the U.S.
where we sell in dollars, and a weakened U.S. dollar could increase local operating expenses and the cost of raw
materials to the extent purchased in foreign currencies. We also have significant monetary assets and liabilities
that are denominated in non-functional currencies.
We enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency
fluctuations on certain foreign currency assets and liabilities. In addition, we hedge certain anticipated foreign
currency cash flows with foreign exchange forward and option contracts. We generally have not hedged our
future investments and distributions denominated in Japanese yen related to Flash Ventures.
Our attempts to hedge against currency risks may not be successful, resulting in an adverse impact on our
results of operations. In addition, if we do not successfully manage our hedging program in accordance with
current accounting guidelines, we may be subject to adverse accounting treatment of our hedging program, which
could harm our results of operations and financial condition. There can be no assurance that this hedging
program will be economically beneficial to us. Further, the availability of foreign exchange credit lines from
financial institutions is based upon available credit. Continued operating losses, third party downgrades of our
credit rating or continued instability in the worldwide financial markets could impact our ability to effectively
manage our foreign currency exchange rate fluctuation risk, which could negatively impact our business, results
of operations and financial condition.
We may be unable to protect our intellectual property rights, which would harm our business, financial
condition and results of operations. We rely on a combination of patents, trademarks, copyright and trade secret
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